Interest earned on money market funds should generally be reported as:

Interest earned on money market funds is classified as taxable interest because money market funds typically invest in short-term debt instruments, such as treasury bills, commercial paper, and certificates of deposit. The income generated from these investments is considered interest income, which is subject to federal income tax.

When an investor receives interest from a money market fund, it is reported to them and the IRS on a Form 1099-INT, which is the standard form used for reporting interest income. As a result, the income is not treated as dividends, which are associated with stock investments, nor is it characterized as non-taxable income since most interest is taxable. Additionally, capital gains arise from the sale of investments at a profit, which does not apply to the income earned on money market funds. Hence, the correct classification for interest earned from these funds is indeed taxable interest.